The business behind the show

Some of the magic comes off the Magic Kingdom

Walt Disney Co. shares tumbled nearly 6% to close at $26.57 a share today after influential media analyst Jessica Reif Cohen of Merrill Lynch downgraded the media company's stock because of concerns about the souring economy.

Disney had been trading at a 20%-to-60% premium to its entertainment industry peers, in part because of what Reif Cohen described as "the highest-quality name" in Hollywood -- something CEO Bob Iger touts as the "Disney difference." Indeed, Reif Cohen expects Disney to continue to defy economic gravity into its fiscal fourth quarter, reporting estimated operating income growth of 7% over the previous year and a 15% rise in net income per share.

"However, this could be the calm before the storm," she warns.

Disney has been the star performer of the large entertainment-company stocks, despite its reliance on revenue from advertising, theme parks and consumer products. That's a credit to the strong management team and the general perception of the brand and its products, Reif Cohen says.

However, she expects operating income to flatten in fiscal 2009, as unemployment rises and consumer confidence erodes. That is likely to hit theme park attendance. (Disney Channel star Miley Cyrus celebrated her 16th birthday at Disneyland in Anaheim on Sunday to promote the new "Celebration Vacation" campaign that begins in January, in which Disney will offer free admission to park attendees on their birthday.)

"Rising unemployment will be the straw that breaks the camel's back," Reif Cohen writes. "We are hard pressed to believe that attendance will not fall in (fiscal) 2009 -- people who don't have jobs simply do not go to Disney World."

Together with advertising and consumer products, roughly 60% of Disney's revenue is susceptible to an economic downturn, Reif Cohen says. Disney's earnings could even fall next fiscal year, despite the strength of the studio's slate over the next two years.

"We think there is significant risk to the stock in the coming months," Reif Cohen concludes.